Charles Plosser of the Philadephia Fed; if you’ve been following these things, you know that Plosser has been warning about imminent inflation since the beginning of the crisis. He did it in 2008; he did it in 2009; he did it in 2010; he did it in 2011; I’m getting tired here, but you can easily find him doing the same in 2012 and 2013. And he has of course been wrong all the way — but he’s doing it again.

The thing about academics and ideologues is that they never seem to be willing to correct themselves, despite being obviously and utterly wrong. If I were willing to link to a certain subclass of eejit, I would [Insert Gold bug link here] explaining why hyper-inflation was immiment.

And as a reminder, please note the category is “Really, really bad calls” is filled with so much stupid it really should be allowed to become the 5oth state, taking the place of Florida, the current leader in all things dumb. (I blame the heat)

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

Wow, that’s harsh, but, you know, when I lived there way back in 1982, I would encounter that culture clash at the local Publix more than once, when an old lady with a Brooklyn whiny accent would stop time at the checkout line disputing a matter of maybe 5 cents on some item, and the checkout girl, who I assume was from some backward hill town in Tennessee, would just be staring daggers at her for the bother.

Another one who has made a late life career move crying wolf is David Stockman. Here he is just recently making a bold prediction and giving out some awful advice: http://seekingalpha.com/article/2379485-dont-buy-this-dip-the-fed-is-not-your-friend Yup, nice call Dave, I think most who followed that one missed out on, what, a nice little 2-3% bounce back? But, I guess it sells books and speaking platforms. Do they get paid for Fox appearances?

I can understand why Plosser might be wrong. That there has been no rampant inflation is, itself, problematic (as in giving a sick patient IV saline, by the gallon, and finding it non-problematic that they haven’t taken a piss in weeks). Two, among other possibilities:

1) Perhaps QE-generated dollars vanish into a debt hole the moment they are created. The best-case scenario for this, as far as I can tell, would be similar to matter canceling anti-matter (things are always balanced). The worst-case scenario being a black hole of debt swallowing the QE, becoming more massive, and constantly demanding more, ad infinitum. The Fed seems to have cemented the Treasury into a pseudo Payday Loan relationship.

2) As with other metrics of money and the economy, those for inflation have been skewed to paint a comparatively abstracted picture of reality. Maybe Plosser is still using the old math.

Interesting to note, also, that the recipients of the QE largess all seem to have experienced unprecedented income inflation (after all — their debt gets settled, and their incomes continue to rise. Double plus good). Who the F needs legitimate profits under that scenario?

Something is rotten in the state of Denmark, and it has a very funky stench.

In the event, QE seems to have produced little increase in aggregate demand. If the intended purpose was solely to shore up the banks and the investments of the wealthy, it has been a rousing success. But economies are all about the movement of money, not about a few misnamed “job creaters” sitting on piles like Scrooge McDucks, and the people who move money the fastest are those who have the least. But, as we know, they have no more money now than they did a decade ago.

C’mon you guys. I can’t speak for all of Florida, but I’m an old geezer living in Sarasota for 5 years now. We have a pretty fair opera company, a world class ballet company, an amazing stage performance scene, an excellent concert hall that brings in all the great acts in America, the best beach in the world, no traffic jams, 3 University campii, many good art galleries, educated and tolerant people, and even a strong Democratic voter turnout. Florida also has the Keys, the Everglades, everything around Orland (yoo much to list), Cape Canaveral, – one could go on and on.Yeah, we also have rednecks and Rick Scott, but there are a lot worse states. Been to Alabama or Missouri lately?? Murray

To me, the more interesting question at this point is why Plosser turned out to be wrong. I don’t feel it was unreasonable to predict at the start of QE, that there would be an increase in inflation, In fact, I think that was one of the ways that QE was supposed to work. The debate with Plosser was whether inflation would run out of control once it started. The big surprise, to everyone, not just Plosser, is that it barely started at all. It appears that all of the monetary stimulus was transmitted directly to the financial markets, rather than to the real economy. It barely had any effect on the housing market, the one asset class where there would have been a palpable wealth effect via asset price inflation, So the real tragedy here is that we have wasted 3 years pretending that QE was helping the real economy, when it in fact it has done very little, except bloat the Feds balance sheet, to a degree that raises all sorts of risks, known and unknown, of which inflation is just one of many. It might have been better if Plosser had been “just a little right” about inflation. Certainly, he should not be made to look the fool. At the very least, he has a lot of good company insofar as he expected that QE would be inflationary. Most people did, including his fellow members of the Fed. Just not to the same degree.

” It barely had any effect on the housing market, the one asset class where there would have been a palpable wealth effect via asset price inflation”

I disagree. It has propped up the housing market, and blown the bubble back up to almost record levels in certain markets, as in some in California. Without that stimulus, the RE market would be in much much worse shape than it is today, (which is still pretty bad, with about 20% of mortgages still underwater), and, therefore, the nation’s and world’s banking system would be basically non existent in it’s current form. We would be in a real bad way without that stimulus and bailout.

Actually he was predictably wrong from the very beginning. He failed to understand that inflation is always driven by wage and demand increases. You first have to have a lack of labor making businesses pay higher salaries, then businesses are forced to increase their prices when they no longer can absorb the salary increases, finally the increased prices do not hurt sales because the costumers have more money (because of increased salaries). That is the inflationary cycle that risks developing into hyperinflation. It is absurd to think that the money supply can or will ever drive inflation. It can accommodate, but not drive, inflation. If government printed 50 trillion dollars and put it in a locked room in fort Knox it would be a total non-event in the context of the economy and inflation. Anybody who understood this would not have been surprised that inflation barely moved in response to the QE’s. The transmission of QE to the real economy was basically to stop the fall, and stabilize housing by providing low rates, as well as to provide the government with an ability to borrow a low rates to deal with the recession. The actual stimulus was supposed to be delivered by the only entity that can provide substantial stimulus – the Federal Government. To continue warning about inflation when it has become clear that the Federal Government would fail its duties, is moronic. Even more moronic is to be fearful that when inflation comes out again then the Fed would be “overrun” unless it begin countering inflation before it appears. Serious inflation can only occur when the labor markets are tight and anybody who have seen the labor markets as tight in the past 5 years is insane. QE was able to help stop the economic fall and prevent a depression, so it did what it was supposed to and not more. To think it would induce serious inflation shows a complete lack of understanding basic economics – scarry considering this guy has been given the task of helping make decisions at the Fed. “Let’s kill the economy or else we may be forced to kill the economy later” – what is wrong with this old fool?

This is yet another example of why Macroeconomics has more in common with religion than with Science.

If these models were treated scientifically, they would have been thrown out (in 2008, 2009, 2010, never mind…) and replaced with better models.

On the other hand, it’s entirely possible that we DID get “inflation”, it was just inflation of the prices of financial assets, rather than inflation of the CPI. But that’s another issue.

It’s also possible that to some extent the CPI is poorly measured and the inflation faced by real world consumers is considerably higher than what is reported to us, but that’s also another issue. We certainly didn’t get the raging inflation we were warned about.

As has been mentioned by some of the previous posters, that MIT “Billion Prices” project is showing that CPI is doing a reasonable job of tracking prices: http://bpp.mit.edu/ Certainly better than our collective memory.

1. A growing “unfilled” demand for labor
2. Businesses increase salaries to obtain and retain workers.
3. Businesses increase prices when they no longer can “absorb” increased labor cost
4. Costumers can afford those price increases (because of 2), and keep buying.
5. Demand for services and products continue increasing. – now back to 1

This is a cycle so if ANY of these steps fail then you cannot get substantial inflation.

1) If there is a real or shadow supply of labor then – NO hyperinflation
2) If businesses resist increasing salaries – NO hyperinflation
3) If businesses can absorb increased labor cost out of their profits – NO hyperinflation
4) If costumers refuse to pay the higher prices – NO hyperinflation
5) If demand stay flat because consumers save, or pay down debt – NO hyperinflation

So before you can get paranoid about impending inflation you have to have ALL 5 things in place AND accelerating. When that happens then wake me up and lets have a talk about finding a balance between inflation and economic growth that will serve the country best in the long run.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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